NIBE Industrier

Eco-friendly heat pump market leader

More and more people are getting excited about the stock market. In the corona year 2020, many used the cheap entry opportunities and started investing their money in stocks, funds, or ETFs. As a result, almost one in six Germans is now invested in stocks - a figure almost as high as at the turn of the millennium. By far the biggest increase was in my generation, young adults under 30. Here, about 70 percent more investors came on board than the year before. A trend that sustainable asset classes in particular can benefit from.

For this reason, today I'd like to introduce Sweden's market leader in eco-friendly heating and ventilation technology. In a way, NIBE Industrier harnesses the power of nature while easing the burden on the environment at the same time. Let's take a closer look at the company, and who knows, maybe the stock is something for your portfolio too ...

The history and business model of NIBE Industrier AB

First, I'd like to take a little detour into the field of heating technology. Its origins go back to the 18th century, when the Scottish chemist and physician William Cullen, while experimenting with evaporated diethyl ether, drew so much heat out of his reaction vessel that a small amount of ice formed. It took until 1852, however, before people realized the principle of these refrigeration machines could also be reversed and thus be used brilliantly for heating. Still, fossil fuels like oil and gas were cheaper back then, and heat pumps failed to catch on for a long time. Only in the 1970s, when crude oil prices shot up massively, did eco-friendly heat pumps become more attractive. And when environmental awareness grew increasingly over the last few decades, this clean heating technology began its final triumphant march.

But back to the history of today's NIBE Industrier AB. Its origins go back to 1885, when Christian Bergh Backer was born in the small village of Flisa (Norway). Even at a young age, it was clear he had a gift for science. So it was no surprise that during his studies he also worked as an assistant to a university professor in Trondheim. Among other things, the professor was working on extracting pure magnesium from seawater. Christian researched the properties of the chemical element and realized that magnesium oxide is an exceptionally good heat conductor. With this insight, he set about developing a new tubular heating element, which he finally and successfully filed for a patent in 1921. A few years later he sold licenses for his method and built his own production facilities. In 1938 Christian Backer set up his own company in England, Backer Electric Ltd. Since his wife Elsa had Swedish roots, after World War II he decided he wanted to build a company there too.

Together with a colleague, Christian traveled to Sweden to get manufacturers excited about his heating elements. Some actually showed interest, but he insisted that his name be included in the respective company name. Since nobody wanted to do that, they had almost given up on the trip. On the way back, they visited Nils Bernerup, Elsa's cousin. He ran a large pig farm and had useful business contacts. And so in 1949 they jointly founded Backer Elektro-Värme AB in Sösdala and started making and selling tubular heating elements. In 1952 Nils also bought a smaller company and founded NIBE-Verken AB (the first letters of his first and last name). There they focused first on water heaters, then on wood stoves, and from 1981 on making heat pumps. In 1989 the Bernerup family decided to withdraw from the business and sold all its shares to some employees and outside investors. They merged Backer Elektro-Värme AB and NIBE-Verken AB and formed NIBE Industrier AB out of them. Business developed brilliantly, and in 1997 the company finally went public on the Stockholm Stock Exchange to drive its global expansion.

How could NIBE Industrier develop in the future?

First, I'd like to briefly sum up the heating and ventilation specialist's business model once more. Thanks to its strong acquisition course over the past decades, NIBE today comprises more than 100 independent companies that produce their own brands and are split across the following three business areas.

• NIBE Climate Solutions (61 percent of revenue): This is where eco-friendly, smart, and energy-efficient products for climate control and water heating are offered.
• NIBE Element (29 percent of revenue): Here NIBE works as an industrial partner offering customized products and smart heating solutions with a focus on sustainability. They also help companies improve their carbon footprint.
• NIBE Stoves (10 percent of revenue): In this business area, the focus is on energy-efficient fireplaces for different requirements and design preferences.

In total, NIBE Industrier employs around 18,700 people worldwide and will continue to make fitting acquisitions in the future. NIBE provides a list of all acquisitions on this page here. Most recently, it bought the British company Heat Trace.

Now let's take a look at the figures for the most recently published quarter (Q1 2021). Revenue for the period from January to March 2021 rose by 7.7 percent to SEK 6,831 million (roughly 678 million euros). Compared to the prior-year quarter, profit even rose by an impressive 45.1 percent to SEK 833 million (about €82 million). Earnings per share came to SEK 1.26. In the first quarter of 2020, that figure was still SEK 0.84. Gerteric Lindquist, the CEO of NIBE Industrier, was cautiously optimistic about fiscal year 2021 despite some difficulties. He mentioned, for example, that due to supply bottlenecks and some price increases from suppliers, they had experienced a shortage of components themselves. However, thanks to its geographic diversification and stable profitability, the company is solidly positioned.

Speaking of geographic diversification: as you can see in the 2020 annual report (page 4), NIBE Industrier generates about 23 percent of group revenue in Scandinavia, about 44 percent in the rest of Europe, 27 percent in North America, and 6 percent in a handful of other countries. So if, like me, you have a bit too much USA in your portfolio, you might enjoy NIBE.

What about the dividend?

Since its IPO in 1997, NIBE Industrier has let its shareholders share in the company's success in the form of annual dividend payments. Since then, the heat pump pro has always managed to pay out the dividend every year. While it wasn't able to raise its dividend every single year, it has at least never had to cut it. Since 2013 it has established annual dividend increases, and with phenomenal growth at that. Over the last 5 years, NIBE Industrier was able to raise its dividend by an impressive 16.8 percent per year. At 0.4 percent, the current dividend yield is still rather low, but the payout ratio of 31 percent signals solid growth potential for the next few years.

Conclusion:
Over the years, the heating technology company NIBE Industrier has built up a strong, leading market position. Through its many acquisitions and innovations, the Swedes have managed to position themselves as a sustainable provider of smart, energy-efficient heating solutions. In my eyes, long-term investors should take a closer look at this company too.